2013 Year-End Tax Planning: Personal Tax Considerations

As January 1, 2014 gets closer, year-end tax planning considerations should be starting to take shape. New tax legislation has brought greater certainty to year-end planning, but has also created new challenges. The number of changes made to the Tax Code and the opportunities these changes bring may seem overwhelming. However, early planning will help you to maximize your potential tax savings and minimize your tax liability. This letter is intended to be a mile-high view of some key year-end tax planning strategies.

Changes for 2013 and beyond

In 2012, year-end planning was complicated by the great uncertainty over the fate of the Bush-era tax cuts. For more than 10 years, individuals had enjoyed lower income tax rates, but these rates were scheduled to expire after 2012. Moreover, many tax credits and deductions that had been made more generous were also set to expire after 2012. In January 2013, Congress passed the American Taxpayer Relief Act of 2012, which made permanent many, but not all, of the Bush-era tax cuts and also some tax benefits enacted during the Obama administration. Congress also permanently “patched” the alternative minimum tax (AMT) to prevent its encroachment on middle income taxpayers. The result is much greater certainty in year-end tax planning for 2013 because we know what the individual tax rates are in 2014, how many tax credits and deductions are structured, and much more.

Of course, there are always complexities in the Tax Code. In 2013, two new Medicare taxes kicked-in (3.8-percent net investment income (NII) surtax and a 0.9-percent Additional Medicare Tax). In addition, the U.S. Supreme Court ruled that the federal government’s denial of recognition of same-sex marriage was unconstitutional, opening the door to allowing married same-sex couples to file joint federal tax returns and take advantage of other tax benefits available to married couples. Beginning in 2014, some of the most far reaching provisions of the Affordable Care Act will become effective: the individual mandate, the start of Marketplaces to obtain insurance and a special tax credit to help offset the cost of insurance.

Planning for expiring tax incentives

First, do not lose the benefit of some generous, but temporary tax incentives that are available in 2013 but may not be in 2014. Are you planning to purchase a big-ticket item such as a new car or boat? The state and local sales tax deduction (available in lieu of the deduction for state and local income taxes) is scheduled to expire after 2013, and you may want to accelerate that purchase to take advantage of the tax break. A valuable tax credit for making certain energy efficient home improvements, including windows and heating and cooling systems, and a deduction for teachers’ classroom expenses are also scheduled to expire after 2013. These are just some of many incentives that will sunset after 2013 unless extended by Congress. The window for maximizing your tax savings for 2013 is closing. Please contact our office for more details.

Planning for new taxes and rates

Some individuals may be surprised that they owe additional taxes in 2013, even with the extension of the Bush-era tax cuts. Three new taxes are in effect for 2013: the NII surtax, the Additional Medicare Tax and a revived 39.6 percent tax bracket for higher income individuals. The 3.8-percent NII surtax very broadly applies to individuals, estates and trusts that have certain investment income above set threshold amounts. These amounts include a $250,000 threshold for married couples filing jointly; $200,000 for single filers. It should also be noted that trusts will hit the highest tax rate with only $11,950 of retained taxable income.  One strategy to consider is to keep, if possible, income below the threshold levels for the NII surtax by spreading income out over a number of years or finding offsetting above-the-line deductions. If you are considering the sale of your home, and the gain will exceed the home sale exclusion, please contact our office so we can discuss any possible NII surtax.

The Additional Medicare Tax applies to wages and self-employment income above threshold amounts including $250,000 for married couples filing joint returns and $200,000 for single individuals. If you have not already reviewed your income tax withholding for 2013, now is the time to do it. One way to reduce the sting of any Additional Medicare Tax liability is to withhold an additional amount of income tax.

As discussed, ATRA extended the Bush-era tax rates for middle and lower income individuals. ATRA also revived the 39.6 percent top tax rate. For 2013, the starting points for the 39.6 percent bracket are 450,000 for married couples filing jointly and surviving spouses, $425,000 for heads of households, $400,000 for single filers, and $225,000 for married couples filing separately. ATRA also revived the personal exemption phaseout and the limitation on itemized deductions for higher income individuals.

Starting in 2013, ATRA also sets the top rate for capital gains and dividends to 20 percent. This top rate aligns itself with the levels at with the new 39.6 percent income tax rate bracket starts: capital gains and dividends to the extent they would be otherwise taxed at the 39.6 percent rate as marginal ordinary income will be taxed at the 20 percent rate. ATRA did not change the application of ordinary income rates to short-term capital gains. However, individuals should plan for the possibility of being subject to a higher top rate (39.6 percent).

Planning for health care changes

Before year-end, individuals need to review how the Affordable Care Act will impact them. The Affordable Care Act brings a sea-change to our traditional image of health insurance. The law requires individuals, unless exempt, to either carry minimum essential health care coverage or make a shared responsibility payment (also known as a penalty). Most employer-sponsored health insurance is deemed to be minimum essential coverage, as is coverage provided by Medicare, Medicaid, and other government programs. Self-employed individuals and small business owners should revisit their health insurance coverage, if they have coverage, before year-end and weigh the benefits and costs of obtaining coverage in a public Marketplace (or a private insurance exchange) for themselves and their employees. Small businesses may be eligible for a tax credit to help pay for health insurance. Individuals may qualify for a premium assistance tax credit, which is refundable and payable in advance, to offset the cost of coverage. Please contact our office for more details about the Marketplaces, and health insurance coverage for small businesses and individuals.

Individuals with health flexible spending accounts (FSAs) and similar arrangements should take a look at their spending habits for 2013 and predict how they will use these tax-favored funds in the future. In 2013, the maximum salary-reduction contribution to a health FSA is $2,500. Remember that health FSAs have strict “use it or lose it” rules, and the cost of over-the-counter drugs cannot be reimbursed with health FSA dollars unless you obtain a prescription (there are some exceptions).

Individuals who itemize their deductions also need to keep in mind the 10 percent floor for qualified medical expenses. This change took effect at the beginning of 2013. It means that you can only claim deductions for medical expenses when they reach 10 percent of adjusted gross income (for regular tax purposes and for alternative minimum tax purposes). There is a temporary exception for individuals over age 65 for regular tax purposes.

Planning for gifts

Gift-giving is often overlooked as a year-end planning strategy. For 2013, individuals can make tax-free gifts (no tax consequences for the giver or the recipient) of up to $14,000 to any individual. Married couples may “split” their gifts to each recipient, which effectively raises the tax-free gift to $28,000. Gifts between spouses are always tax-free unless one spouse is not a U.S. citizen. In that case, the first $143,000 in gifts made in 2013 is tax-free.

There are special rules for gifts made for medical care and education that can be a valuable component of a year-end tax strategy, especially for individuals who want to help a family member or friend. Monetary gifts given directly to a college to pay tuition or to a medical service provider are tax-free to the person making the gift and the person benefitting from education or medical care.

Gifts to charity also are frequently made at year-end. Through the end of 2013, taxpayers age 70 ½ and older can make a tax-free distribution from individual retirement accounts directly to a charity. The maximum distribution is $100,000. Individuals taking this option cannot claim a deduction for the charitable gift.

Planning for retirement savings

Year-end is a good time to review if your retirement savings plans and tax strategies complement each other. For 2013, the maximum amount of contributions that can be made to an IRA is $5,500, with a $1,000 catch-up amount allowed for individuals over age 50. Keep in mind that the maximum amount that can be contributed to a Roth IRA begins to decrease once a taxpayer’s adjusted gross income crosses a certain threshold. For example, married couples filing jointly will begin to see their contributions begin to phase out when their AGI is $178,000. Once their AGI reaches $188,000 or more, they can no longer contribute to a Roth IRA. For single filers the corresponding income thresholds for 2013 are $112,000 and $127,000. Please note that 2013 contributions, for tax purposes, may be made until April 15, 2014.

Traditional IRAs and Roth IRAs are very different savings vehicles. A traditional IRA or Roth IRA set up years ago may not be the best savings vehicle today or for the immediate future if employment and other personal circumstances have changed. Some individuals may be contemplating rolling over a workplace retirement plan into an IRA. Very complex rules apply in these situations and rollovers should be carefully planned. The same is true in converting a traditional IRA to a Roth IRA and vice-versa. Every individual has unique goals for retirement savings and no one size fits all. Please contact our office for a more detailed discussion of your retirement plans.

Planning for Small Businesses

There are also strategies available for small businesses seeking to maximize tax benefits in 2013.  Two of the business incentives scheduled to end or significantly change after 2013 are the bonus depreciation allowance and the enhanced section 179 expensing provisions.

Bonus depreciation is scheduled to end after 2013 if not renewed by Congress. Additional 50-percent bonus depreciation was extended by the American Taxpayer Relief Act of 2012 (ATRA, signed into law on January 2, 2013) for one-year only and applies to qualifying property placed in service before January 1, 2014. In the case of property with a longer production period and certain non-commercial aircraft, the extension also applies to property acquired before January 1, 2014 and placed in service before January 1, 2015.

Unlike regular depreciation, under which half- or quarter-year conventions may be required, a taxpayer is entitled to the full, 50-percent bonus depreciation irrespective of when during the year the asset is purchased. Therefore, year-end placed-in-service strategies can provide an almost immediate “cash discount” from qualifying purchases, even when factoring in the cost of business loans to finance a portion of those purchases.

An enhanced section 179 expense deduction is available until 2014 for taxpayers (other than estates, trusts or certain non-corporate lessors) that elect to treat the cost of qualifying property (so called section 179 property) as an expense rather than a capital expenditure. The current section 179 dollar cap for 2013 is $500,000. For tax years beginning after 2013, that dollar limit is officially scheduled to plunge to $25,000 unless otherwise extended by Congress. For tax years beginning in 2013, the overall investment limitation is $2 million. That level is also scheduled to fall to $200,000 in 2014. Please contact our office regarding how to best benefit from these provisions in 2013.

Georgia Tax Credits

The State of Georgia has several state specific credits against Georgia income taxes.  Many of you may be aware of or have utilized the Georgia Private School Credit.  Each year Georgia sets aside an amount of money which is available to taxpayers who qualify in advance for the benefit.  Married taxpayers can claim up to $2500 and single taxpayers up to $1000.  Since there is a finite amount available, the fund will be fully utilized well before the end of 2014.  If you wish to claim this credit, you should make it a New Year’s resolution and apply for qualification at the beginning of 2014.  You can get more specific information at http://www.gadoe.org/External-Affairs-and-Policy/Policy/Pages/Tax-Credit-Program.aspx or talk directly with your private school.  This credit is a win/win since you get every dollar up to the limit back on your tax return and you also get a federal income tax deduction on Schedule A if you itemize. 

The film industry in Georgia is entitled to tax credits.  The law allows these credits to be transferred to other taxpayers.  As a result, unused credits are being sold at a discount and you can purchase them to satisfy your Georgia tax liability.  Additionally, you get a full itemized deduction for the amount of the credit but you must report the discount as a short-term capital gain on Schedule D.  An additional benefit is that the credit is treated like withholding and can minimize or eliminate the need for estimated payments and possibly withholding.

A small but frequently overlooked credit is the $150 Driver Education Credit.  If you pay for your child to take a driver’s education course and get a certificate of completion, you are entitled to a credit of the amount spent up to $150.

It should also be noted that the income tax exclusion on retirement income, for taxpayers who are 65 and older, will increase from $100,000 in 2013 to $150,000 in 2014, $200,000 in 2015, and to an unlimited retirement income exclusion effective in 2016.

We have reviewed only some of the many year-end tax planning strategies that could help you minimize your 2013 tax bill and maximize savings.  Please contact our office to schedule an appointment to personalize your 2013 year-end tax planning.

For more information regarding this or any other tax planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Musings from the CEO (Fall 2013)

Mike_Hoffman_17Here’s a dire prediction. You will remember 2013 as the year your taxes really went up! There has been a perfect storm of tax law changes that take effect in 2013, combined with the expiration of a number of recession tax relief measures, and the general prognosis that earnings and investment income are finally moving up in 2013 and into 2014.

In 2011 and 2012, those of you with earned income noticed a reduction in your Social Security withholding from 6.2% to 4.2%. That reduction is gone for 2013. You will also notice a Medicare tax increase of .9% that kicks in on earned income for those married taxpayers with modified adjusted gross income in excess of $200,000 for single taxpayers and $250,000 for married filing joint. This was part of Obamacare.

Also related to Medicare is a new Obamacare tax on net investment income, which includes capital gains (even taxable gain on the sale of a personal residence) of an additional 3.8% for those individual taxpayers with modified adjusted gross income of over $200,000 and married taxpayers with modified adjusted gross income of over $250,000.

The personal exemption phase outs (PEP) were eliminated during the recession over the last several years, but come back for 2013. This means that the deduction you would normally get for personal exemptions is phased out again, starting for those with adjusted gross income of over $250,000 for individual taxpayers or $300,000 for married taxpayers filing jointly.

Similarly, the limitations on itemized deductions, which had been suspended over the last several years, come back with a vengeance in 2013. These so-called Pease limitations reduce your itemized deductions up to 80% starting with individual taxpayers with adjusted gross income exceeding $250,000 or married taxpayers with adjusted gross income of over $300,000.

The threshold or floor for deducting medical expenses has been increased by 33 1/3% for 2013. In 2012, qualified medical expenses in excess of 7½% of adjusted gross income were deductible as an itemized deduction, and that threshold/floor has been increased to 10% for 2013.

Tax rates in general have gone up as a result of legislation taking effect in 2013. The top individual income tax rate has increased from 35% to 39.6%. The dividends and capital gains tax rate has increased by 1/3 from 15% in 2012 to 20% in 2013.

The Social Security wage base increased from 2012 to 2013 up to $113,700. That is the amount of earned income which is subject to the Social Security tax of 6.2% for an employee or 12.4% on earnings considered as from self employment.

What does all this mean? Tax rates on earned income have increased from potentially 52.1% (46.1% federal income tax, social security, Medicare, and 6% Georgia) to 61.8% (55.8% federal income tax, social security, Medicare, Obamacare and 6% Georgia). That’s 18.6% increase, and that’s the best scenario. Dividends and capital gains tax has increased 41.9%, from 21% (15% federal, 6% Georgia) to 29.8% (20% federal, 3.8% Obamacare, 6% Georgia).

Primarily, it means get your year-end planning done soon to mitigate any surprises. The need and the benefit of accelerating deductions or deferring income could be the most significant you have ever witnessed. Caution is advised to determine if you are in an alternative minimum tax situation, as this will have a significant effect on some year-end tax maneuvers that you might employ.

Examine your withholding and estimated payments to determine that you have eliminated or minimized any under-payment penalty. Explore the use of a plethora of state tax credits that are available, particularly in Georgia, to pay your state taxes. This could result in saving anywhere from 10% to 40% of your state tax liability, combined with the elimination of any potential under payment penalties.

Most tax preparers have software available to run a mock-up of your 2013 tax returns. This could come in handy to guide you as to whether it is advisable for you to accelerate certain deductions, harvest some capital losses to offset capital gains, convert traditional IRA assets to Roth IRAs, or confirm that your judgment to do nothing is rational.

In addition to being a full service law firm, Hoffman & Associates maintains a stand-alone tax practice area dedicated to the preparation and filing of all types of tax returns. Please do not hesitate to contact me or any of us if we can arrange to assist you in achieving some significant income tax savings for 2013.

For more information regarding this or any other estate or tax planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Musings From The CEO (Summer 2013)

Late last year many of our clients were scurrying around to do some last minute gifting.  The fear was that the $5,000,000 gift and estate tax exemption would fall back to $1,000,000; therefore, the opportunity to remove a significant amount of wealth from their taxable estates (and the future appreciation on such property) would be lost forever.  Ironically, or typically, after the 12th hour (at approximately 2 a.m. on the morning of January 1, 2013), Congress passed a new tax law making the $5,000,000 exemption permanent and increasing the tax rate from 35% to “only” 40% (as opposed to the anticipated 55%).  Congratulations to those who completed these estate planning maneuvers, as their families will benefit for generations to come from their, albeit maybe last minute, action.

Under the heading “here we go again”, on April 10th, the Obama Administration published their annual wish list of 2014 revenue proposals.  Several of the provisions related to estate planning, including, are you ready for this, changing the estate and generation skipping transfer tax exemptions back down to $3,500,000, and the gift tax exemption to $1,000,000!  The proposal includes another increase in the tax rate to 45%.  Additionally, the Obama Administration proposes to limit and curtail the use of GRATs (Grantor Retained Annuity Trusts), the technique of gifting or selling assets to a grantor trust, limiting the duration of exemption from generation skipping transfer tax to 90 years (as opposed to unlimited dynasty trusts in some parts of the country), and requiring the reporting to the IRS of purchases of life insurance in excess of $500,000.  As President Reagan said so succinctly, “There you go again!”.

One message is clear.  For those of you that embarked on significant estate planning back in 2012 and prior, congratulations.  For those of you who did not, and who need it, giddy-up!

Enough about estate planning.  The American Taxpayer Relief Act of 2012 (which became law on January 2, 2013), and the Patient Protection and Affordable Care Act of 2010 (“Obamacare”) both become effective in 2013. Therefore, we will be spending a lot more time doing income tax planning.  The classic strategies of maximizing your deductions, reducing ordinary income, trying to achieve long term capital gains versus ordinary income, accumulating tax exempt income, deferring taxes and offsetting income with losses all need to be reviewed and expanded.

For high income taxpayers, up to 80% of itemized deductions can be lost.  For high income taxpayers, tax rates will exceed 39.6%, and combined with state income taxes could easily exceed 50%.  For high income taxpayers, dividend and capital gains rates increased 1/3 from 15% to 20%.  For high income taxpayers, the personal exemptions will be phased out and there will be a Medicare surtax on investment income of 3.8% and on earned income of .9%.

Income taxes have taken a sharp increase, deductions are being reduced, and the level of your adjusted gross income is critical to proper planning.  Be prepared to immerse yourself into these new income tax matters between now and the end of the year. For a lot of us, the tax savings or costs will be very significant.

 

For more information regarding estate planning, business law or tax controversy and compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.